President Barack Obama on Dec. 31 signed into law legislation to impose sanctions on firms doing business with the Central Bank of Iran, a move intended to make it more difficult for Tehran to sell oil abroad.

Iran’s oil sales amount to more than half of its income. Because of international sanctions on much of Iran’s banking sector, it must rely on its central bank for the financing of oil purchases, making sanctions against the bank in effect a prohibition on other countries importing Iranian oil. In recent months, Congress has been increasing pressure on the administration to sanction the bank. (See ACT, November 2011.)

The new law blocks companies and financial institutions from accessing the U.S. financial system if they are found to be engaged in a “significant financial transaction” with the bank, but includes a six-month grace period for sanctions applied to oil purchases from Iran. It gives the president the option of waiving the sanctions if there is insufficient oil in the global market to make up for losses resulting from the sanctions or if countries have demonstrated that they have “significantly reduced” their reliance on Iranian oil.

The sanctions are largely based on an amendment proposed by Sens. Mark Kirk (R-Ill.) and Robert Menendez (D-N.J.) to the fiscal year 2012 National Defense Authorization Act, which was the bill that Obama signed on Dec. 31.

During a Dec. 1 Senate Foreign Relations Committee hearing on the proposed sanctions, administration officials warned that the legislation under consideration by Congress could backfire. “There is absolutely a risk that in fact the price of oil would go up, which would mean that Iran would in fact have more money to fuel its nuclear ambitions, not less,” Undersecretary of State for Political Affairs Wendy Sherman told the panel.

Secretary of the Treasury Timothy Geithner also sent a Dec. 1 letter to Sen. Carl Levin (D-Mich.) opposing the measure. He warned that countries “are more likely to resent our actions and resist following our lead—a consequence that would serve the Iranians more than it harms them.” Instead, he urged “properly targeted” sanctions aimed at the bank.

U.S. allies have been discussing ways to reduce their reliance on Iranian oil. The 27-nation European Union considered a British- and French-proposed embargo on Iranian oil in December, but could not reach consensus on the matter largely due to objections by Greece, whose economy is in dire fiscal straits and relies on Iran for roughly 14 percent of its oil.

Menendez said during the Dec. 1 hearing he was “extremely disappointed” with the administration’s opposition to the measure. He noted that administration officials had previously expressed support for his efforts to adjust the sanctions to address their concerns.

“The original amendment had no waivers whatsoever,” he said, “Maybe we should have allowed that to stand.”

That same day the Senate voted unanimously for the amendment.

A House-Senate conference committee agreed Dec. 13 on language to reconcile the Senate amendment with a House provision contained in a bill applying a wide range of sanctions on Iran.

“The conference report includes four modifications to the Senate language, but preserves the scope and implementation timeline of the Senate provision,” according to a Dec. 13 press release by the House and Senate armed service committees.

The House adopted the sanctions on the central bank as a stand-alone measure Dec. 14 while the Senate adopted the defense authorization bill, which included the central bank sanctions amendment, Dec. 15.

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